Healthflex Update: Clarification on Health Care Rule Change

11/6/2013

Late last week, the Internal Revenue Service (IRS) published Notice 2013-71 which modified the “use-it-or-lose-it” rule for health flexible spending accounts (health FSAs). The Notice generally allows employer-provided cafeteria plans to be amended to provide a carryover of up to $500 of unused amounts in a participant’s health FSA into a subsequent plan year. The $500 carryover amounts may come from employer or employee contributions. The carryover amount may be applied only in the year immediately following the FSA’s plan year; at the end of the carryover year, any unused funds will be forfeited. Moreover, the carryover amount does not count toward the $2,500 annual limit on employee contributions established by the Affordable Care Act starting in 2013. Therefore, if adopted, a participant could have up to $3,000 in his or her health FSA account during a given year ($500 carryover plus up to $2,500 new contributions for the plan year).

The General Board is examining the impact of this regulation change on the HealthFlex Plan. HealthFlex maintains a health FSA (called the medical reimbursement account or MRA) available to participants of plan sponsors that have not opted to maintain their own cafeteria plans and FSAs. In 2006, the General Board adopted the 2½-month grace period (Grace Period) for HealthFlex health FSAs. The Grace Period allows participants to continue to incur reimbursable claims until March 15 of the year that follows the applicable health FSA plan year, i.e., until March 15, 2014 for 2013 plan year FSA elections.

Health FSAs are permitted to incorporate the new carryover feature, or the Grace Period, but not both. If HealthFlex is amended to adopt the new carryover feature, the Grace Period must be eliminated.

Under the new regulation, the FSA must be amended before the end of the plan year to implement the carryover feature. The General Board will not implement the carryover for the 2013 plan year (for carryover into 2014) as it is too late in the year to effectively implement, communicate and administer this change.

However, the General Board will examine whether the modified use-it-or-lose-it period would be more beneficial than the current Grace Period for the 2014 plan year, taking into consideration that participants are currently making contribution elections for 2014 health FSAs based on Annual Election communications that describe the Grace Period in effect.

The carryover feature and currently implemented Grace Period do not apply to dependent care FSAs.